How To Build A Better Financial Planning Practice

Independent advisors face a daunting array of tasks in building a successful practice, but one of the most important is usually among the last to be addressed--how business metrics can help ensure that your firm is productive, profitable and competitive.

While the upside to using business metrics adroitly is big, accomplishing it is no small feat. Some metrics, like asset growth, are relatively straightforward. The same can't be said for how your firm's asset growth will be influenced by investment performance, client contributions and distributions, new accounts and account cancellations. That said, it is increasingly important in a competitive environment to know not just that your assets are growing but why.

Many advisory firms spent 2009 trying to do more with less but are now positioning themselves for growth. As they do so, here are some key indicators to keep in mind:

--Growth Factors, including bringing on new accounts, market performance and contributions. Monitoring growth is critical. You could be growing your asset base yet losing accounts on a net basis.

--Attrition Factors, including closed accounts, market performance and distributions. You need to know if clients are leaving or simply taking distributions from their accounts. If your account base is primarily comprised of retirees taking distributions, you need to be actively bringing in new accounts just to make up for lost assets from distributions.

--Staff Productivity Ratios. As you grow your firm, you need to ensure that your operating margin also increases. Revenue growth and the addition of staff won't create a straight line, but it's important that you know when you're reaching capacity and about to hit an investment "J-curve."

--Client Productivity Ratios. Which clients are the most important revenue generators for your firm? The success of your firm could be dependent on how focused your staff is on serving these clients well.

--Average Account Size Trends. Are the new accounts that you bring in increasing or decreasing your firm's average account size? The answer to this question will be a leading indicator of your firm's operating margins over time.

--Net New Accounts and Net Assets Under Management for the measurement period. It feels great to bring in new accounts and assets, but it's important to compare these gains with other accounts that your firm is losing? This metric provides a brutal reality check.

--Composite Performance for the period. Compare how your accounts are doing against indexes and make sure that your performance is where it needs to be.

It's not enough to merely compile information; for it to pay off, it must be an integral part of the decision-making process. Ultimately, analyzing the data will allow you to see how your business has evolved and a sense of where it is headed. Set goals to reverse troubling trends, like a service model that's incompatible with your pricing structure or poor productivity due to underinvestment in technology.

Devoting time to analyzing business metrics might seem like it will take too much time away from your customer focus. However, setting and monitoring benchmarks is critical to your long-term success. It's also important to keep in mind that business metrics don't just shed light on flaws and inefficiencies. They can also point out new opportunities that will help you take your business to the next level.

Eric Clarke is president of Orion Advisor Services, LLC in Omaha, Neb. More information is available at: www.orionadvisor.com.